Oil trade generalities

• Libyan daily production (pre-war) was ≈ 2.07% of the world supply by volume (1.8/86.8).
• Libyan proven reserves are about 3.46% of known world reserves
• While unquestionably large, Libyan oil production capacity and proven reserves are both a tiny fraction of extant world supply.
• The spread between high and low quality oil is significant, but small. High quality Libyan oil goes for only 13% more than the price of low quality Mayan Heavy, and only 2% more than the average world oil price.
• Thus, as a gross first-approximation estimate, Libya’s 2% of world production may be said to contribute about (0.0207… * 1.02) = 2.12% of world price’s supply component (2% of world production, and only 2% more expensive than average oil).
• The contribution of the supply component to the final market price of oil is unknown. As a crude first approximation, if we assume 30% of the price derives from financial speculators, that leaves 70% for supply and demand. If these are approximately balanced in the long term, as OPEC actively seeks to do via production controls and leaving some capacity idle, then around 35% of the price is supply and around 35% of the price is demand. This means that, very roughly estimating, Libyan production contributes about 0.7% of the final price of crude oil (0.35 * 0.0212). This component is in any case most certainly orders of magnitude less than the ordinary market volatility induced by speculative capital flows on a daily basis.
• Available OPEC excess production capacity is more than capable of making up for lost Libyan production.
• OPEC governments have a strong interest in containing the unrest in Libya.
• They don’t really care who wins, so long as it’s stable.
• OPEC would like NATO / US to arrange for stability in Libya, as part of the oil-for-security compact negotiated with the US during the late stages of the Cold War.
• Thus, motivated to make up for the lost production in exchange for NATO doing that.
• NATO is at the advantage in bargaining in the short and medium term:
• worst case scenario for NATO is long-term higher energy costs.
• worst case scenario for OPEC governments is the protests spreading and leading to dissolution of their regimes and wealth.
• major inconvenience for NATO vs. an existential threat for OPEC.

Costs of the Libyan war to NATO

• Cost to Britain is appx. $640,000 per day (1.6 * £400,000 per day (£260 million / (3.5 months * 30 days in a month)))
• Cost to the US is appx. $9.5 million / day ($716 million / (2.5 months * 30 days))
• Cost to France is appx. $1.86 million / day (1.43 * €1.3 million per day (€160 million / (4 months * 30 days))
• Costs to other NATO countries are non-negligible but overlooked here for simplicity
• Total cost for 3 main players on the NATO side is ≈ $12 million per day
• Costs will continue to grow as the war drags on
• Not to mention dead people and political costs

Conclusions

• Since Libyan oil was already heavily under the sway of western oil companies, and since they were already exporting almost all of their oil to Europe and the US at market prices, in USD, there was no motive to attack them for access to their their oil per se (as in Iraq).
• The contribution to the price of oil made by financial speculators (approximately 30%) is far, far higher than the contribution to the price of oil made by Libyan supply (appx. 2.12% of only the supply component of the price).
• Regulating hedge funds more strictly would be a far less costly and far less controversial way to bring down crude prices, if that were the goal.
• One might try to make the case that the intervention is designed to protect the capital investments of western companies in Libya from destruction in a civil war, though this would be hard to establish since Western oil companies’ capital infrastructure (wells, pipelines, etc) would likely be destroyed anyway even with a full-scale NATO intervention.
• Even if all Libyan oil were 100% owned by western companies (very unlikely in any scenario), it would still not contribute a significant amount to world oil supply or prices, nor much addition to oil companies’ profit margins compared with what they were making there before the war.
• They were already making obscene amounts of money in Libya anyway before the war
• The war will shut down production entirely for months, perhaps years
• The war will destroy much/most of their very expensive physical capital investment in Libya in infrastructure (wells, pipelines, etc.)
• thus, Western oil companies would have been far better off financially if the war had not happened.
• Therefore, it’s most likely that the war is actually an internal Libyan factional dispute, not engineered by evil western imperialist capitalists for their own benefit.
• This is far from a full-scale intervention. $12 million per day is a drop in the bucket compared to what NATO could be spending on this intervention if they so chose.
• Thus, NATO is not very interested in ending the war in Libya. It’d be nice, but they aren’t going to go out of their way, or to any considerable expense, to do so.
• More likely, the intervention is a token effort to placate other OPEC governments’ calls for the US/NATO to do something to stabilize the region while not committing to yet another long and politically unpopular foreign war.
• Also, a message to the Libyans and to Arabs generally that NATO is paying attention, if not intervening at full capacity, to discourage the unrest from spreading beyond Libya
• The small scale of the intervention vs. capacity to intervene could also be a bargaining tool to attempt to induce OPEC to increase its daily production more or make other similar concessions.